Become a Fan

One of the original reasons I decided to keep my talented, but flawed Blackberry Storm was that it was Rhapsody-Ready, meaning it could use the portable Rhapsody To Go music service so that I could stop carrying an iPod, plus my phone. It's a longer stor and later blog, but the Rhapsody To Go just doesn't work consistently well enough to recommend, unlike my amazing experience with the Rhapsody/Sonos/iPod Touch combination, which is earth-shattering (later post).

At the same time that I was getting rid of Rhapsody To Go, Slacker introduced its very cool caching Slacker Mobile Radio service. For those not familiar with Slacker, its CEO is Dennis Mudd, the former founder of music jukebox company MusicMatch, which was, hands down, the best multimedia/digital jukebox/internet radio software until Yahoo bought it a few years ago for lots of money, and then destroyed it, mostly by accident and neglect, and somewhat through plain stupidity.

Slacker's original mission (from what I can tell) was to build a very cool set of hardware that would allow a user to get a version of the great MusicMatch radio service onto a set of hardware that would allow a user to play it back offline, with no connection to the PC, satellite, etc, where they originally got the music. When the user later hooked up to the music source, the software would transmit the plays, the ratings (key part of software), and would then receive new music down to the Slacker hardware. This type of "offline interactive radio" is a special type of music and needs to be specially licensed from the set of labels, and it looks like Slacker did all of that work, and it raised tens of millions of dollars to build the buiness. It was actually a great idea until the multi-purpose IPod came along and destroyed that vision...

So while Slacker is rolling out this hardware, the iPod comes along, and is now followed by a variety of other smartphone players like Microsoft, Blackberry, Palm and Nokia, all of which are producing incredibly capable mobile hardware devices with lots of storage and Internet connectivity. So Slacker intelligently builds a free Blackberry version of its software - and the heavens open up.

I'm kidding, but the fact is that the new Blackberry Slacker software is game-changing - a user gets the same type of interactive radio that he/she would expect on a dedicated Slacker device, but it occurs on a Blackberry phone (needs big ass memory card, but most have it) and it works offline, which is 99.9% better than all Wifi-based applications on any device anywhere in the world. What this means is that unlike relying on the always uncertain 3G or Wifi service from Verizon, a user can download Slacker radio stations to the device itself, and the play it offline, not using any minutes or bandwidth from the phone carrier itself. This is game-changing - I want and now have the ability to just set a free radio music device (Storm) next to me on the way to Tahoe, and occasionally skip or recommend songs, confident that when I later sync the device, that more relevant songs will arrive - and it's all free, with a cheap subscription option granting more interactivity...

What do I mean? It means that I choose a bunch of radio stations, either popular genre ones like Country or I can choose specific ones like Matt Nathanson, and the Slacker system spits out a set of songs that match that radio station, and then it caches all of that music (many stations) on the ever bigger memory card on the phone - I can the play those songs without using the phone service or WiFi service - it's all already on the phone. You can skip and rate songs, among other features, but you have to listen to that stream of music vs choosing each song - when you sync up the phone to your PC, as many BB users do, the device uploads the songs, the preference, and then downloads the new songs.

How is the experience? The short answer is that since installing the Blackberry Slacker, I don't use any other music service on the phone, and I probably consume it 2-6 hours a day, every day (like I said, I used to run Rhapsody, so I like music) The long answer is that the service is technically easy to use and I'm huge fan of the music, but that it doesn't deliver the same breadth or quality as a Pandora or Last.Fm. The "new music" isn't that new and the "Rock Hits" feels stale, like it's a few months too old. These issues are apparently related to the type of license rights that Slacker has obtained, and it feels to me like even in the last few weeks that the overall music variety has been significantly increasing.

That having been said, I find myself increasingly using the Slacker service to the exclusion of other services like Rhapsody in the car & phone, so my view is that the cached radio service will probably satisfy 95% of the population, and Slacker does an amazing job of doing that vs almost any other service I know - it's a free, highly personalized, offline radio service - it's MusicMatch 2.0,and I highly recommend getting it.

Apple (APPL) today previewed the iPhone OS 3.0 due to launch this Summer. in addition to the expected improvements such as Cut & Paste, MMS, and Push Notifications, Apple intelligently moved to the forefront of the virtual goods line by implementing a system called "In-App Purchase".

This will allow users to purchase additional items from within an iPhone app rather than forcing them to either buy a separate app to fund their currency or forcing them to leave the app to finish the purchase - this could be game levels, virtual goods, Kindle digital books, in-app songs, etc. but the absolute key to this feature is that there is already ONE WALLET in the Apple system. Unlike the vast majority of social media sites which have ignored this approach, Apple has a central wallet which allows for one-click purchasing from a trusted source rather than forcing users to sign up for some whacky wallet system for each application they are using. It's almost impossible to express how much smoother this makes the overall purchase effort, thereby significantly increasing not just the initial revenue from a user, but all follow-on purchases, as we have found at Meez when we implemented it

Electronic Arts (ERTS) demoed The Sims 3 on stage using the system to purchase additional avatar items from within the app, and one can easily now imagine the wide array of revenue models this will open up for app developers, all of whom will be thrilled to share 30% with Apple in order to tap this capability, which will start to drive increased profitability from the Apple Store. It's the same options everyone has been begging for from MySpace and Facebook for months, but with no results for reasons few can understand, although the 3rd largest social media site Hi5 this week announced a similar system.

The only downside I can see is that Apple is currently limiting the functionality to paid applications, and not for free ones. I'm not 100% sure why that would make sense unless they are trying to favor the paid applications by holding back this compelling functionality since the "free to play" virtual currency model obviously makes more sense for "free" applications like Poker than it does for paid applications which will have fewer users by definition of being premium. The advantage from Apple's view is that this should focus more developers on paid models by giving them another revenue source on top of the initial payment, and it will leave the free applications as true demos or lite versions.

In any case, this is a huge step forward for the virtual item-based world since it will trigger an increased level of innovation in this area, which is what we at Loki Partners have been preaching for months since it's the perfect complement to the declining advertising business, and it will supplement the premium model as well. It's great for developers and it's great for Apple as well. Now let's see what the other mobile competitors do, as well as the big social media sites.

McDonald's Corporation (NYSE: MCD) is the world's largest chain of fast food restaurants, serving nearly 58 million customers daily. McDonalds started in 1940 and yet in February 2009, 69 years after it launched, it again turned in a stellar sales month, increasing same store sales 1.4% over the previous February, in spite of one fewer day and a horrible economy. This wasn't always true - 10 years ago, the critics were saying that McDonalds was over in the US as a growth company, that the format was tired, and that it would never again increase sales. But instead, a series of new CEO's (the old ones kept dying) re-invigorated growth by refocusing on the core business of serving fast, simple, value-priced food to its customer - the company has since continued to increase its same store sales almost every single month, which is the key business health indicator in most retail businesses.

So how is that relevant to virtual economy-based companies? It's becoming increasingly relevant because some of the more "mature" virtual economy-based firms are starting to see slower sales in their core business, leading some critics to say that a virtual item business outside of China or Second Life just can't exceed $2-3M a month in revenue. That statement is wrong, but let's look at the reasons behind it.

In the last few years, the rise of social media and community sites has created hundreds of companies of that have millions of registered users, lots of repeat visitors and high levels of engagement. For example, our virtual world Meez is now #10 in the US in overall engagement with 2M+ monthly unique visitors, or Inside Social Games lists here more than 25 Facebook games that had 1M+ users in February- these sites and games didn't exist 2 years ago, but are now growing like crazy.

In spite of all of this engagement, or sometimes because of it, advertising rates have simply plunged due to massive over supply of impressions, a weak economy, and low click through rates on traditional display ads since the users are engaged in a discussion, not a commerce experience. Therefore, many sites have intelligently begun to roll out virtual currency systems to enable their more committed users to purchase different types of status - each time the site rolls out different things to purchase, the revenue goes up. At Meez it went from avatar items to virtual room items to in-room animations to gifts, etc. So you keep rolling out more things to buy, and revenue increases, but generally less so with each new feature.

Then the last thing new virtual economy sites do to increase revenue is to increase the number of ways to purchase virtual goods. At Loki Partners, we've studied a wide variety of virtual economies and the most popular payment options in order are credit cards, Paypal, mobile, pre-paid cards, Offers/cpa/surveys, and cash in the mail, but this vibrant industry keeps producing new ways to facilitate currency purchases. Each time a site offers a new payment option, revenue increases 10-20%, although that decreases with most succeeding options as the law of diminishing returns kicks in.

So now what does a virtual economy-driven site do? It has lots of engagement, lots of things to buy, and lots of ways to buy the currency. Well, it's kind of like McDonalds - once you've saturated the country with stores, and your stores can't hold any more equipment, and you can't generally increase prices, then in order to keep growing, you actually have to run a business, and not just throw payment options and new items at the users with no real method behind the madness - its far more effective to run your business more efficiently than to continue to market to new users or to always build new games.

As the Wall Street Journal stated today in its big McDonalds article (here) about how the company is continuing to grow: Behind the effort is an increased focus on examining reams of customer
data measuring everything from whether customers are trading down to
smaller value meals or dropping Cokes from their orders to exactly how
much they're willing to pay for a Big Mac. "I love numbers," Mr.
Alvarez says. "I think data used well really tells a story."

And that is the key driver: DATA/ANALYSIS. Eventually a business has to truly understand its operations, such as what's driving purchases, what type of user is buying items, which items are they buying, are the prices elastic or inelastic, which purchase methods are used by the most profitable customers, where do the most profitable customers come from, etc?. Many virtual economy sites I see can't even produce a simple report detailing their Money Supply/M1 - that means each week did the economy grow in the overall money supply or shrink, and if so, what were the top sources of currency, and what were the top sinks of currency? Without that type of Analytics and Reporting, sites will never be able to approach McDonalds way of steadily growing their revenue each month, even without driving more customers or building more stores, both of which cost more money.

One example is that in Q3 2008 at Meez we looked at our overall economic reports and we saw that there was too much currency coming into the economy - no user ever really had to buy anything. Therefore, we significantly adjusted how we awarded currency in return for labor - we reduced the number of coinz given initially at sign-up, we increased the spread of prices of our goods, and we really pulled back on the number of coinz given per level of game while increasing the coinz awarded for certain game trophies - this significantly increased our monthly revenue while still driving the type of user behavior we were trying to incent.

None of this would have been possible without a sophisticated reporting and analytics system which took us way too long to build, so make sure you either have a good team to build one as a key part of your business, or go license a system like TwoFish (where I'm on the Board) or a similar system which provides that deep level of analytics, reporting and catalog management. It's the only way to organically grow a site's virtual item revenue once you have tapped out the other obvious methods - it works for McDonalds and it will work for your sites as well as we all drive the virtual goods business to $1B+ in 2010.

Update: Benchmark partner Bill Gurley just published a similar, but far more analytical post about the same topic (here)

After having the same conversation multiple times last month at Casual Connect Europe (see post here),
as well as with numerous other big social communities, the easiest way
I can express the value of virtual goods to non-gaming and non-virtual
world sites is that Only Virtual Goods Will Pay for Community Features.

What
do I mean by that? If you have a general consumer-oriented site that
has community features (forums, chat, profiles, IM) as a big part of
its traffic, then you have no way to currently pay for it, even if it
has tons of traffic. There is very little commerce taking place in
general community sites, few profitable advertisers want to be any
where near this type of user-generated content, and almost no users
will pay a separate subscription fee for it. Yet community features
are driving the bulk of a site's traffic, producing tremendous
time-on-site stats, and page views per visit - all at less than $.05
CPM (and declining), especially if you have a decent portion of non-US
traffic.

Where virtual commerce enters the equation is that it is
the ONLY proven method where active users in a community will pay tens
of cents per month per user to:

personalize their experience

differentiate themselves from friends

thank people for doing something

show off for others

flirt with some users

simply waste time with friends

in general, pay to be noticed

Those tens of cents per month quickly add up to tens of thousands of
dollars per month in total revenue for smaller sites, and hundreds of
thousands of dollars per month for bigger sites. For a huge site like
Facebook, even its relatively primitive gifting program generates
millions of dollars per month, and that's by barely trying. For a site
with non-US traffic, it's even more important to drive this business
since few countries outside western Europe and the US can support a
robust advertising solution, yet those countries have hundreds of
millions of Internet users. Hi5 and Tagged have realized this and are busily rolling out entire virtual goods economies.

Some folks I speak with seem to
believe this will only work for hard core gamers or for teenagers. The
data from Meez and other similar sites like Pogo actually shows that women aged
25-54 will pay the most for virtual commerce, and they do it in a wide
variety of sites, not just in gaming ones, so it will work well for sites like BabyCenter, CafeMom, and TheKnot.

If you have a site
with a big set of community features, and you're not offering a rich
virtual commerce program, you're just leaving money on the table, which
is a tough thing to do in this environment.